6 Signs Your Financial Adviser Is Ripping You Off

Trusting a financial adviser is easier when they’re wearing a business suit. A well-tailored hull whispers success and credibility, before you even start trying to navigate the financial waters with them.

I’m reminded of the commercial where a DJ is transformed into a financial adviser by receiving a haircut and a fancy suit. He’s then placed in a plush conference room, located in an investment firm. He meets with clients and starts throwing out financial jargon. The clients eat it up, and are ready to invest with him. Why wouldn’t they? The financial literacy in our country is so low that if someone looks and sounds like an adviser, we’ll toss money at them, hoping they’ll put our hard-earned dollars to work better than we could. Of course, the reality is that not everyone in a suit has your best interests at heart.

When money is involved, conflicts of interest are bound to surface. New fiduciary regulations will help plug the publicized $17 billion leak in retirement savings that pour out in the form of excessive fees every year, but truth be told, the regulations don’t go far enough. They were watered down in response to heavy backlash from the financial industry. More importantly though, crooked financial advisers will always exist as long as there are ill-informed customers in the marketplace.

How do you know if your financial adviser is ripping you off? Fortunately, enough crooks are caught to establish patterns and tell-tale signs of when you should take your money and run the other way, before your adviser does the same to you.

1. This stock is so good it …

The most appealing red-flag statement on a 10-point scale is “This stock has outperformed the Dow Jones Industrial Average each year for the last 5 years.”

Research prepared for the Financial Industry Regulatory Authority finds that 40% of respondents like the sound of this sleazy investment pitch. In reality, it should set off alarm bells in your head. You may think your adviser has found the next hot stock, but as any honest market participant will tell you, past performance is no guarantee of future results. Using the Dow as a benchmark may sound impressive, but it’s merely used to lure in the naive.

A good financial adviser won’t recommend a stock based on what an index of 30 other stocks is doing at some point in time. Instead, a good financial adviser will find appropriate investments based on your life goals and risk tolerance levels. He’ll care more about your personal situation than what the Dow is doing.

2. What could possibly go wrong?

Run the other way. | Daniel Roland/AFP/Getty Images

Appeal rating: 6.15

Run the other way if you hear: “The lowest return you could possibly get on this investment is 50% annually, but most investors are making upwards of 110% a year.”

Warren Buffett isn’t getting these kinds of returns for shareholders. What makes you think this financial adviser is so special? And if he is so special, why isn’t he working for a billionaire like Buffett? Why is he wasting time pitching you when he could be buying a private island with those supposed sky-high returns?

No one has a foolproof crystal ball. The financial markets go up, down, and sideways. If the markets are known for anything, it’s for surprising investors. A good financial adviser may remind you that over the past 100 years or so, stocks have returned roughly 7% after inflation on an annual basis, but he’ll caution you that the future will certainly not mirror the past, and returns are not guaranteed by any stretch of the imagination.

3. You can’t lose!

Cam Newton after losing Super Bowl | Kevin C. Cox/Getty Images

Appeal rating: 6.12

People hate losing money. In fact, there’s a saying on Wall Street that rule number one is never lose money. Rule No. 2 is never forget rule No. 1. Crooked advisers know people hate to lose money, so they say things like: “There is no way to lose on this investment — it is fully guaranteed.” In fact, 43% of respondents find this statement appealing.

Of course, you should really find the statement appalling. There are always ways to lose money on investments. Returns are made possible through risk. Stocks can crash. Bond issuers can default. Real estate can collapse. Beanie Babies can go out of style. Anyone guaranteeing something that sounds too good to be true is probably scamming you.

4. Let me give you 2 great reasons to invest in this company

GoPro stock chart | StockCharts.com

Appeal rating: 5.88

Hearing “This investment is for a company with excellent management and in a high growth industry,” might not trigger any red flags at first, but once again, your adviser should be focusing on your big financial picture. He shouldn’t be trying to lure you in with vague descriptions that get you overly excited about an individual stock pick. Thirty-two percent of respondents find this statement appealing.

If you need a reminder of what can happen to exciting companies in the stock market, take a look at GoPro’s stock chart above.

5. Everybody is doing it!

Bernard Madoff | Stephen Chernin/Getty Images

Appeal rating: 5.40

Scammers need legitimacy. The biggest frauds in history involve high degrees of trust. Just look at Bernie Madoff, the New York stockbroker and former NASDAQ Chairman who ran the biggest Ponzi scheme ever seen, defrauding investors out of $65 billion over several decades. He had thousands of clients, and even gave interviews claiming how “virtually impossible” it would be for someone to violate regulations for a considerable period of time.

Most shady financial advisers don’t have the titles and exposure that Madoff had while he was running his Ponzi scheme. Yet, crooked advisers might try to get you to invest by saying, “This investment made hundreds of people extremely wealthy.” If you hear this, grab your wallet. It’s a red-flag statement. Unfortunately, it’s also a statement that 30% of respondents find appealing. Remember, like your mother told you, just because they jump off a bridge doesn’t mean you should too.

You can take a peek at your adviser’s credibility (if they’re registered) by checking out the Investment Adviser Public Disclosure database, where past disciplinary actions are listed. Background snapshots for brokers can be found at the BrokerCheck tool. Keep in mind that this is only a start. You can see the work history of these people, but still take caution as Madoff had a clean file until 2008.

6. You’re so lucky because …

Lucky lottery ticket | Saul Loeb/AFP/Getty Images

Appeal rating: 5.14

No, you’re not one of the luckiest people alive to have found an adviser who is getting you in early on the next Apple. The sixth sign your adviser is ripping you off is hearing something like, “This is an opportunity to get in on the ground floor of a company that is about to roll out a revolutionary new technology.” Twenty-five percent of respondents find this statement appealing. Tips are for waiters. Insider tips are for criminals. You don’t want to be either one.

Instead of getting caught up in what your future yacht might look like after you cash out on this supposed revolutionary company, ask your adviser what he’s charging you for this “opportunity.” His deflection and vague answer should be all the confirmation you need to run the other way. In fact, asking how they get paid is one of the first questions you should ask any adviser you’re considering handing money to. If he gets paid by receiving commissions on the products he sells you, as opposed to a flat fee (typically 1% of assets under management), you’ll need to strongly consider that his advice could be heavily biased.